Analysis of business innovation potential

ABSTRACT

A method of determining a business&#39;s innovation capability consists of using a computer and internet based system which has a questionnaire program to obtain answers relating to 6 foundation capabilities and 6 innovation capabilities which are weighted and transformed by an algorithm into a value index which is used by management to improve innovation performance and by management and investors to forecast future growth and profitability of the business.

This invention relates to a method of determining a measure of abusiness's potential for innovation as an aid to business management andas a measure of a business's potential to achieve a high return oninvestment from the business.

BACKGROUND TO THE INVENTION

Analysis of business risk and predicting the likelihood of a businessperforming in the future are difficult tasks that are increasingly indemand by investors and business managers.

WO98/20438 discloses a needs analysis computer system which consists ofa program providing questions with yes no answers, a program providingappropriate responses to the answers and means to select a degree ofimportance of each response the selections being stored in memory and anoutput of proposed actions being provided at the conclusion of theprogram. This program is suitable for small business assistance but doesnot predict future performance.

WO0011671 discloses a system of matching entrepeneurs with investorsusing a communication network and includes data to enable investors toassess the entrepeneur.

WO0034911 discloses a system for depicting the effect of businessdecisions on market value. The system classifies assets into tangibleand intangible asset categories and models market value as a function ofthese categories.

WO0068861 discloses a benchmarking analysis system in which a benchmarkprovider receives appropriate data from number of suppliers and then thedata is analyzed on a weighted basis keyed to the suppliers status inthe industry and then compared to the industry averages. The supply ofthe data and the benchmark report at regular intervals aids businessdecision making.

WO0073945 discloses a method for making a loan based on an intangibleasset such as intellectual property. This enables a lender to assess thevalue and liquidity of the intangible asset.

These recent developments do touch on the importance of intellectualcapital but do not measure the performance of the process that producesintellectual capital. Innovation has come to be seen as essential to abusiness using its intellectual capital to develop new products,processes and designs to achieve growth in sales and achieve andmaintain a high rate of return on investment [ROI]. The process ofinnovation and the key factors for successful innovation are becomingbetter understood but the implementation and management of innovationpolicies are difficult.

What is needed is a means of evaluating innovation performance so thatprogress can be tracked over time. Such a measure should not only beuseful for managers wanting to benchmark and improve their performancebut also for investors to use as a guide in comparing a company to itscompetitors and in predicting future earnings and ROI.

It is an object of this invention to provide a measure of innovationcapability.

BRIEF DESCRIPTION OF THE INVENTION

To this end the present invention provides for use with a computer or acomputer network, a system of measuring innovation capability for use inmanaging a business or assessing valuation of a business consisting of

-   a) a survey questionnaire to be completed by a plurality of    personnel in the business in which groups of questions correlate    with one or more of a multiplicity of factors related to innovation    capability-   b) an answer database for storing and assembling answers to the    questionnaire and creating a value for each answer-   c) optionally, a recommendation database of recommendations for    improving performance based on existing factor scores-   d) a first algorithm for converting the sum of the answer values to    each question into a score-   e) a second algorithm for summing the scores for answers in each    group into a score for each innovation factor-   f) a third algorithm for summing the scores of all the factors into    a value index which is indicative of the business's potential return    on investment-   g) a display program for presenting the values for each factor and    the value index-   h) and optionally a program utilising the factor scores and the    value index for generating from said recommendation database,    recommendations to management for improving the innovation    capability of the business.

Preferably the system utilises the internet and questionnaires areanswered on line. The system may be used to diagnose the innovationcapabilities of a business and to improve the innovation performance bygenerating a prioritised set of recommendations based on an analysis ofthe answers and the factor scores.

The subject of the questions constituting each innovation factor are keyindicators of the effectiveness of the organisation in the factor. Whenall factors are resourced adequately and managed effectively theorganisation optimises the application of assets applied to innovation.The performance of an organisation at innovation is dependent on theeffective utilisation of resources devoted to innovation plus theeffective utilisation of resources used to manage all other processesand relations within the organisation.

Preferably the first algorithm weighs the answer values of selectedquestions and calculates the mean and median scores for all questions.

The second algorithm preferably sums the weighted mean scores forquestions associated with each factor into a score for that factor

DETAILED DESCRIPTION OF THE INVENTION

This invention uses a generic open system model of businessorganisations which evaluates the six capabilities which are here calledthe foundation capabilities:

-   1. General management, which integrates the other five factors-   2. Strategy for the business and competitive strategy-   3. Environmental scanning-   4. Marketing and sales-   5. Production/operations-   6. Administration including finance IT and human resources.

These capabilities overlap with each other but also operate in dynamictension because in some situations they have differing and even opposingpurposes. As conventionally practised, these capabilities do notnecessarily involve innovation and may even be used to preventinnovation. Businesses That score well on these six capabilities do notnecessarily grow and achieve above average ROI. Business growth derivesfrom the creation of value through the development of new products ormethods and new business designs which are generally a result ofpurposeful innovation. To predict future earning potential it isnecessary to have an assessment of a business's innovation potential.Innovation potential depends on how well the innovation capabilities aredeveloped and managed.

This invention is partly predicated on the realisation that innovationcapabilities are essentially subsets of the foundation capabilities. Thesix innovation capabilities are:

-   1. Leadership-   2. Innovation strategy-   3. Fostering innovation via the external environment which involves    the purposeful use of external data, relations and networks as    sources of ideas and innovation.-   4. Internal environment for innovation. The job designs,    organisational structure decision making and reward systems that    foster creative thinking and problem solving while also providing    the framework for routine work processes.-   5. The innovation production process which is essentially create,    capture, assess, apply. This is the process of idea generation and    application which can be in conflict with the firm's production    process because production focuses on efficiency and innovation    focuses on adaptation-   6. Maintenance and measurement of innovation

In the context of businesses and organisations understood as opensystems the six innovation capabilities are in “natural” conflict orcreative tension with the six foundation capabilities.

The utilisation of resources for the foundation and innovationcapabilities gives an insight into the potential of a business togenerate earnings growth and above average ROI.

The preferred algorithm for determining the value index V is:V=I R/100[w1+w2+w3+w4+w5+w6]+F R/100[W1+W2+W3+W4+W5+W6]+P[Revenue/Marketcapitalisation]

Where:

The optionally additional component P[Revenue/Market capitalisation] isa measure of the impact of innovative business system designs on theperformance of a business as such designs can have a dramatic impact onROI. P is a number between 1 and 5 derived from data collected from thebusiness.

w1, 2, 3, 4, 5, 6 and W1, 2, 3, 4, 5, 6 are the innovation andfoundation capabilities expressed as a weighted percentage representingthe effectiveness and impact of resource utilisation for the respectivecapability and is derived from the weighted average of a set ofquestions in the survey questionnaire.

For foundation capabilities the weightings are:

W1 Management 7.5%  W2 Strategy 25% W3 Environmental Scanning 2.5%  W4Marketing 20% W5 Production 35% W6 Administration 10%

For Innovation capabilities the weightings are

w1 leadership 7.5%  w2 strategy 20% w3 scanning  5% w4 internalenvironment 20% w5 innovation process 40% w6 measurement 7.5% 

I R is the % of resources devoted to innovation and is based on R & Dexpenditure and estimates of expenditure on other specified types ofinnovation derived fro the answers to the audit including time devotedto innovation.

F R is the % of resources allocated to foundation activities

And IR+FR=100

Additional weights Y and Z [which have empirically determined valuesbetween 1 and 10] may be added to the w1 and W1 factor weights to takeaccount of the relatively high impact of leadership and management as aresult of these functions having a coordinating and integrating role inrelation to all other functions and extraordinary effects such as theeffect of CEO departure on stock prices.

The value index measurement can be assessed at intervals of 6 months ormore to give an overall view of the progress of the business.

The value index can also be used to forecast Innovation Potential Rank[IPR] which is an indicator of performance two years from the time ofmeasurement. The forecast algorithm is based on the fact that companiesthat currently apply more resources to innovation than their competitorsand better manage the resources they apply will, with the exception ofextraordinary events outperform their competitors in the medium term.

In order to create a score for each innovation factor and eachfoundation factor answers to sets of questions relating to each factorare scored and financial and other data on the business being measuredare collected.

Indicative questions for each factor are given below. These questionsare written for senior managers. Other questions are written so thatthey can be answered by any employee. Most questions are phrased asstatements that respondents rate on a scale.

Sample Questions

Management Factor

Both successful and unsuccessful projects are reviewed. Reviews focus onlessons that can be learned and insights gained

Across the company there is excellent communication between technical/R& D personnel and commercial/marketing personnel

Managers in our company know how to set up, lead and maintain effectiveteams

Leadership Factor

Managers, from the top down, draw employees' attention to the value ofideas, creative thinking and innovation by what they say and what theydo

This company has enough people with the qualities required to leadinnovative projects and ventures. (e.g. making things happen, handlingambiguity and uncertainty, building stakeholder support)

Strategy Factor

Our managers agree on the major opportunities, threats and constraintsfacing the company in the next few years

Our managers know what our competitive advantage is and also how ourcore competencies underpin that advantage

Strategy for Innovation Factor

Our company's vision, value and strategy documents set out clear demandsand opportunity areas for innovative thinking and action (e.g. creatingnew customers, markets, products, services, ventures or alliances)

People in our company know what its main sources of growth will be inthe next few years and use this knowledge to develop and assessinnovative business cases/investment proposals

External Scanning Factor

Our managers know how to assess the impacts of trends anddiscontinuities beyond the immediate industry environment (e.g. longterm technological, social trends)

Our managers and supervisors tell staff about external trends anddevelopments (opportunities and threats) and also engage them inthinking about responses.

External Environment for Innovation Factor

The company has leading edge customers and suppliers and works with themin value creating partnerships

The company actively monitors the products, services and strategies ofcompetitors with a view to imitating and/or bettering them

Marketing Factor

Rate the quality and effectiveness of brand building and management

Rate the quality and effectiveness of marketing and sales strategies,plans and programs

Internal Environment Factor

Our organisational structure (reporting relations, roles, authorities,delegations) allows and encourages individuals and teams to takeinitiative and to try out new ideas

The company actively recognises people who find and apply valuableinnovative ideas.

Production/Operations Factor

Quality thinking and practices are embedded in the company and help tomaintain and improve its performance

Rate the efficiency and responsiveness of production/operations

Capture, Assess, Apply Factor

Our company is know and respected for its research leadership

The company knows how and where to facilitate breakthrough thinking

Where I work there are effective ways of capturing ideas and suggestions

I know how to use stories and metaphors to present novel ideas andproposals

Administration Factor

When I need to, I can get a rich supply of information on our products,processes, projects and performance

Only reviewed, high value materials go into our online knowledge system.

Measurement & Maintenance of Innovation Factor

The company is developing ways to measure the value of its intangibleassets (brands, knowledge, intellectual capital, patents, etc.)

Managers and staff in the areas of accounting, personnel and financerecognise and support the activities that foster innovation, even whenadditional or unusual demands are involved.

Validity Testing

Eleven organisations, seven companies and five public sectororganisations completed the WAVE audit.

The appropriate personnel—senior executives and a cross section ofmiddle managers completed the questionnaires. In some cases allpersonnel from a Division of a large organisation completed the audit.

One of the limitations of the research was the small sample—only elevenorganisations took part. Another unavoidable limitation arises from thefact that one of the audit questionnaires collects data only from seniorexecutives, and there are typically a very small number of these—between4 and 20 in most companies and business units. Many statistical tests ofsignificance require a moderate number of responses and the small numberof responses, eg less than ten, limited the power of the tests in somecases.

Content Validity

The conventional method for establishing content validity, ie that theinstrument is measuring what it purports to measure is by literaturereviews and research analysis. In the case of WAVE extensive reviews ofexisting instrument measuring quality and business excellence wereconducted. The literature on innovation was also reviewed.

Construct Validity

The first three hypotheses were aimed at establishing the constructvalidity of the instrument. The tests were aimed assessing whetherexpected relations between various parts of the models were confirmed bythe data.

The first hypothesis tested was that performance on innovationactivities factors (V factors) would be lower than performance on thefoundation factors (F factors).

The test was applied to all six factor scores on both Managers andEmployees data.

The rationale for the hypothesis is that companies and organisations arebetter at designing and managing “Foundation” activities than“Innovation” activities because they have been doing it for much, muchlonger. The management of innovation, encompassing product, process, R &D, and business design innovation is in its infancy, as a codified fieldof practice, and there are very few theories or models.

For the Managers data, many of the differences between F and V scoresfor the factors were significant, with V being significantly higher thanF scores. There were only a few cases in which the reverse was true(e.g. for some the companies on the External factor).

For the Employee data there were quite a few significant differencesrecorded, with F scores being superior to V scores for the majority offactors. There was one exception, as the mean V scores for the Externalfactor tended to dominate over the F scores.

Nearly all cases in which the hypothesis was not confirmed related tothe function “External Environment” the items (questions) in theinstrument used to construct the External Environment” function wereexamined. The full description of this function is “Using sources ofideas and knowledge from the external environment, such as people innetworks that are cultivated to stimulate creative and innovativeconcepts”.

The second hypothesis was that the Managers would have higher scores onthe six factors than Employees. The factor scores analyzed were themeans of both V and F items for four of the six factors.

It was expected that senior managers would give more positive ratings ofperformance than their subordinates on most areas measured, especiallyin less well managed companies.

There was good support for the second hypothesis across three of thefour factors.

The unexpected findings on the “External environment” factor areexplained by the comment made previously.

The third hypothesis was that innovation performance over the past threeyears (question 2) would be lower than overall performance over the sameperiod. (Question 1). It was expected that in most cases the managementof innovation would not be as strong as overall management andperformance.

This Hypothesis was supported in six of the eleven companies.

When analysing the data in the context of knowledge of the companies, itbecame apparent that situational factors, such as a decline or very weakimprovement in performance over the previous three years, would limitsupport for this hypothesis to companies where there had been moderateto high improvement in overall performance.

Predictive Validity

The fourth hypothesis was that Managers' expectation (question 3) offuture performance based on innovation is correlated with the aggregatefactor score for all of the V items, that is, the overall innovationcapabilities across the company. A significant correlation indicatesthat there is a relationship between Managers' expectations of futureperformance and current innovation capabilities

The correlations between current innovation and future performanceranged from moderate to high and were significant for seven companies.Small sample sizes meant that results for three other organisations wereinconclusive.

The fifth hypothesis was that composite WAVE scores (called the Index)would indicate the future performance of profit based organisations.This hypothesis is the most important of all. The key test of theaccuracy of a measure is its relationship against an independentexternal measure. This hypotheses could only be measured some time afterthe data was collected. The results are shown in the table 1.

TABLE 1 WAVE Audit Scores compared with actual performance one yearlater (Return on Total Assets) for 8 companies. Correlation 0.74 Returnon Executive Company Foundation Innovation Foundation Innovation WAVEAssets Forecast Code Scores Scores Resources % Resources % INDEX 00/01*Accurate? 1 64 51 0.95 0.05 6.34 1.6 Yes 2 64.8 53 0.90 0.10 6.36 3.1Sample too small 3 67.5 54.5 0.95 0.05 6.69 9.9 Yes 4 70 57 0.95 0.056.94 5.9 Yes 5 66 58 0.90 0.10 6.52 10.8 Sample too small 6 67 56 0.950.05 6.65 11.5 Yes 7 73.5 67 0.80 0.20 7.22 12.6 Yes 8 75 60 0.90 0.107.35 14.7 Yes This table only includes profit based companies. Otherorganisations that took part in the research and were included in otherstatistical tests were government departments. *Financial data is takenfrom published sources. Australian Financial Review and Business ReviewWeekly and from information supplied when published data was notavailable.

The data collected was from both very large companies and medium sizedautonomous business units of large companies involved in diverseindustry sectors including power utilities, chemical processing, controlinstrumentation, medical instruments, banking and telecommunications.

A highly simplified version of the algorithm was used to calculate thesingle figure index. The average of all foundation and all innovationfactors were multiplied by an estimate of the resources applied to each.No weights or adjustments were applied.

The correlation of 0.74 obtained is considered high by statisticians.

Despite the diverse industries and competitive conditions faced by thecompanies, and the simplified formula used, the WAVE measure for thesecompanies has a strong relationship with financial performance.

From the above it can be seen that the present invention provides aunique system for assisting businesses to improve innovation performanceand measure the performance in a way that is not only meaningful formanagers but also for investors.

1. A computer network based method of measuring innovation capabilityfor use in managing a business or assessing valuation of a businesswhich includes the following steps: (a) conducting a survey over acomputer network of managers and employees in a business in which groupsof survey questions, requiring answers that are rated on a scale,correlate with one or more of a plurality of factors, wherein saidfactors are related to business foundation capability and innovationcapability, wherein business foundation capability factors are selectedfrom General management, Strategy for the business and competitivestrategy, Environmental scanning, Marketing and sales,Production/operations, and Administration, and innovation capabilityfactors are selected from Leadership, Innovation strategy, Fosteringinnovation, Internal environment of organizational structure and rewardsystems, Innovation production process, and Maintenance and measurementof innovation; (b) assembling, by a central processor, the answers basedon said scale in a central database and creating a value for each answerin a central processor; (c) converting, by said central processor, thesum of the answer values to each question into a score for foundationcapabilities using a first algorithm; (d) summing, by said centralprocessor, the scores for answers in each group into a score for eachinnovation capability using a second algorithm; (e) summing, by saidcentral processor, the scores of all the factors into a value indexwhich is indicative of the business's potential return on investmentusing a third algorithm; (f) said third algorithm for the index value isV=IR/100[w1+w2+w3+w4+w5+w6]+FR/100[W1+W2+W3+W4+W5+W6] Where w1, 2, 3, 4,5, 6 and W1, 2, 3, 4, 5, 6 are the innovation and foundationcapabilities expressed as a weighted percentage representing theeffectiveness of resource utilization for the respective capability andis derived from the weighted average of a set of questions in the surveyquestionnaire; IR is the % of resources devoted to innovation and isbased on R&D expenditure+New Product Development expenditure; FR is the% of resources allocated to foundation activities; and IR+FR=100; and(g) generating, by said central processor, predetermined recommendationsrelevant to each score for improving the innovation capability of thebusiness using the factor scores and the value index.
 2. A method asclaimed in claim 1 which additionally includes (a) a recommendationdatabase of recommendations for improving performance based on existingfactor; and (b) a program in said central processor utilizing the factorscores and the value index for generating from said recommendationdatabase, recommendations to management for improving the innovationcapability of the business.